Planning your exit Featured

8:00pm EDT August 26, 2009

Developing your exit strategy will be one of the most difficult decisions you make for your business.

After years of building your business into a success, it may be hard to figure out what will happen to it after you leave. You need to carefully review your options and make a decision based on your goals and motivations. You also need to start the process early to avoid any problems.

“Too many business owners wait until they want to retire to begin seriously considering their exit strategies,” says Josh Curtis, director, merger and acquisition services at GBQ Capital LLC. “Exit strategies cannot be planned and implemented overnight.”

Smart Business spoke with Curtis about how to start planning for your exit, the importance of reviewing your plan and how to prepare your employees for your exit.

How can you begin planning for your exit?

Start early. For a first generation founder, it can take up to, or possibly longer than, 18 months to determine and implement a comprehensive plan. Surround yourself with advisers who can help you access alternatives. Go into the process with an open mind, and be clear about what is important to you.

You have to look at your financial goals, such as if there is a minimum dollar amount that allows you to retire comfortably. But you also need to determine how long you want to be involved in the business. Do you want to sell and be in Florida as soon as possible, or have a hand in the business for a while? You also have to determine if you are more financially or legacy driven. Are you more motivated by dollars or by preserving your business legacy? You still have viable options to exit your business in this market, some of which may yield high net proceeds.

What are some of the different succession planning options?

There are five main options:

  • Pass the business to family. This option provides estate planning opportunities, ongoing cash flow, and peace of mind for future generations, but it does not necessarily maximize value for the owner. The buying family member must have the skills and financial savvy to establish authority to generate profits. Mismanagement can reduce the value of the business, affect ongoing cash flow to the entrepreneur and disturb family relations.
  • Management buyout. This strategy is ideal for companies with a strong management team. The team may consist of one individual who was second in command or several individuals who can run the business together. This is a way to reward individuals who helped the business become successful.
  • Employee stock ownership purchase. This strategy is the most complex and is not feasible for all businesses. However, there are significant tax and financial benefits to the owner and business. An independent valuation specialist will determine the valuation upon sale. If the owner plans to exit after the transaction, the company needs to have a succession plan in place.
  • Sale to financial buyer. Despite the economic conditions, a significant amount of liquidity remains in the private equity market. Private equity firms provide one alternative for sellers to sell to a third party, but avoid selling to a competitor. Because these buyers generally will not recognize the same degree of synergies as a strategic buyer, sale valuations are oftentimes lower. Financial buyers typically retain the management team, as well as other employees and sometimes the owner during the transition phase.
  • Sale to strategic buyer. This alternative generally yields the highest valuation at the time of sale due to the synergies a strategic buyer will realize from combining businesses. A typical strategic buyer may factor long-term synergies into the offering price. But the longevity of the owner, management team and employee base may be in jeopardy after the sale.

You need to learn about each option and not write one off before you are educated on it. Talk with experts and also put your company in each option to see the financial and management impacts each option would have on your business.

What should you look for in a successor?

Culture, personality, experience and education are important. The person needs to get along with you and you need to trust him or her. The person also should have a similar management style to yours, because you may not want the culture to change considerably after you leave.

The longer you are able to transition the business and the more you can work with the successor, the more successful the transition will be. You may find someone from within whom you want to step into the owner’s role, and then groom him or her for that position.

How important is it to review the plan and make any necessary changes?

It is important because the business can change. For example, your business may have grown since you developed your plan, and the people you have identified to take over may not be capable of doing so now. The older you get, the more you should revisit it. Too often, owners pass away, become ill or have circumstances change while still owning their businesses and do not have a succession plan in place. This creates a significant burden and risk to the business and remaining family members.

How do you communicate your succession plan to employees and prepare them for your exit?

It depends on the exit strategy. If it is an ESOP, that will likely be communicated as good news to all employees. If it is a management buyout, talk to key management who can communicate it to others. A sale is a bit tricky, because you will not be able to tell most people until the deal is complete.

You have to figure out what is appropriate for your company. Talk through the ideas with your advisers and determine how you are going to communicate the plan.